## Facts

- Alaska Public Service Employees Local 71 (the union) was a tax-exempt labor organization under IRC §§ 501(a) and 501(c)(5).
- The union maintained a general fund that received member dues and other revenue, including investment income.
- The union also maintained a separate fund known as the Political League, which was used to finance political activity.
- Union members and employees could choose to have a portion of their dues designated for contribution to the Political League.
- In 1984, the union’s board authorized a $25,000 transfer of undesignated money from the general fund to the Political League.
- The union earned more than $50,000 of investment income in 1984.
- In 1987, the IRS advised the union that it intended to tax the 1984 transfer.
- After receiving the IRS notice, the union attempted to rescind the transfer by causing the Political League to transfer $25,000 back to the general fund.
- The IRS treated the original 1984 transfer as taxable and determined a deficiency.
- The union petitioned the United States Tax Court to contest the deficiency.

## Issues

1. Whether the union’s 1984 transfer of $25,000 from its general fund to its Political League was subject to tax under IRC § 527(f) as a political expenditure by a tax-exempt organization.
2. Whether the union’s later attempt (in 1987) to “rescind” the 1984 transfer by moving $25,000 back to the general fund eliminated or changed the union’s 1984 tax liability.

## Decision

- The Tax Court sustained the IRS’s determination that the 1984 transfer was taxable under IRC § 527(f).
- The Tax Court treated the $25,000 moved to the Political League as a political expenditure for 1984.
- The Tax Court rejected the union’s attempt to avoid the 1984 tax result through a later “rescission” carried out in 1987, after the IRS announced its intent to tax the transaction.
- As a result, the union was liable for the deficiency attributable to the 1984 political expenditure.

## Legal Principles

- A tax-exempt organization may be subject to tax on certain political expenditures under IRC § 527(f), even though it is otherwise exempt under IRC § 501(a).
- For purposes of § 527(f), transferring funds from an exempt organization’s general treasury to a separate political fund can constitute a political expenditure.
- A later attempt to reverse a completed transaction does not ordinarily change the tax treatment for the year in which the original transaction occurred, particularly when the reversal happens in a different tax year.
- The rescission concept generally requires that the parties be returned to the status quo within the same taxable year as the original transaction; a multi-year, after-the-fact reversal will not usually undo the earlier year’s tax consequences.

## Conclusion

The Tax Court held that the union’s 1984 transfer of $25,000 from its general fund to its Political League triggered tax under IRC § 527(f) as a political expenditure by a tax-exempt labor organization, and the union’s 1987 effort to reverse that transfer did not negate the 1984 tax liability.


Alaska Public Service Employees Local 71 v. Commissioner, T.C. Memo. 1991-650 (1991)